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Friday, May 11, 2012

KenolKobil (Takeover) - Update

The shares of KK have been indefinitely suspended from trading by the CMA starting 8th May 2012, following the Cautionary Statement released on 7th May 2012.

See Link to Prior Blogpost - with link to Cautionary Statement

It is not clear if the CMA issued the suspension notice based on KK's request or acted unilaterally. There has been a lot of debate of the appropriateness or justification of the suspension since some shareholders cannot exit their positions. This reminds me of the (failed) BOC takeover bid of Carbacid when the shares  of both firms were suspended from trading for 4 years from 2005 to 4th Nov 2009.

The management of KK feels that the Takeover (at least the sale of shares in KK to Puma Energy) will be completed in 2012 which would leave the Minority Shareholders in the cold.

The CMA has to protect the Minority Shareholders by ensuring they are given the right to offer their shares to Puma at a similar price (or value) to Puma as the Key Shareholders. There will be the question about KK remaining a Listed Firm but based on what Puma's actions in Zambia, it seems unlikely if Puma can get 80% of the shares offered to them.

In Zambia, Puma purchased BP's shares in BP Zambia (renamed Puma Zambia) then ran into some headwind. I am not sure of the full details but it seems Puma will make a Takeover offer for the remainder it does not own. Due to lack of Listings in Zambia, the LuSE & SEC seemed reluctant to let Puma Zambia de-list. Furthermore, the price on LuSE has tripled since the sale by BP to Puma so Puma may not have an incentive to pay the market price.

*The LuSE & SEC have also blocked Airtel from delisting Celtel Zambia (in which it bought a majority stake from Celtel International) by buying out Minority Shareholders then de-listing. The shares have been suspended from trading indefinitely as well!

In essence, will Puma pay for 25% (Minority Shareholders) today for what it paid for the 75% (BP's shares) 3 years ago? I don't have all the details but this should be interesting & will it apply to the Kenyan situation?

A high enough price offered by Puma would convince most Minority Shareholders to sell their shares. The ranges vary but Kestrel Capital (a far better outfit than the Not-The-Standard Investicon Skank) who are also acting as advisers to the Key Shareholders did indicate a value of KES 17.25 in their last research report.

My valuation is higher:

  • The lawsuit vs KPC. I did not understand why the judges thought the award was too high in view of the 'economy' when the various scams KPC has indulged in are of similar, if not higher, amounts! I will reserve my judgement on their judgement. At a gross value of KES 6bn that is 4/- PBT (2.75 PAT) added to NAV. Of course, it is speculative but KK, is not giving up & seems to have a good chance it will prevail.
  • The Annual Report (Chairman's Statement & Comprehensive Income Statement) indicated a large potential loss in 1H 2012 due to Forward Forex Hedges. The net effect may be an EPS of 'zero' for 1H 2012 thus no net effect on valuation going forward.
  • Huge real estate exposure in Kenya (especially in Nairobi & Central Province - whatever that is called nowadays) which has been Kenya's most productive areas. *There is even a place named after Kenol - Kenol Township (which I passed through) - near/towards Kangema!* KK has prime real estate for developmental purposes in Addis Ababa (Ethiopia) as well as Rwanda. It is very hard to estimate the gains in RE values but this could easily add KES 3-5 to the NAV as reported.
  • The 2011 EPS was 2.21 (diluted). There will always be challenges for KK with the volatile KES, interest rates & oil prices but if that is a normalized EPS [a further discount required for ESOP, Management & CEO options] then using a PER of 10 [based on KK's consistent growth & current depressed market prices] this would be: 2.10 x 10 = 21/-
So if we add the 'business value' of 21/- (should be discounted by cheap/free rents on properties owned or long-term leased by KK) + (potential) award vs KPC + Development Real Estate (includes maximize use of current locations by adding stores, buildings, offices without closing the petrol stations) = 25/- less transaction expenses = 24/- net!

Thoughts? 

19 comments:

Kauka said...

CT

In agreement with your valuation range although I came in at 22/= per share. I didn't factor in award vs KPC which to me is travesty of justice and goes to show the lack of sufficient grasp of financial matters by our commercial courts where they are very worried and scared about absolute quantums as opposed to looking at relativity.

KK does 200B+ revenue therefore 5B is just above 2% of total revenue and a possible award in a commercial dispute. I don't see a judicial officer with enough bottle to give such an award besides the CJ himself. Pity our lawyers with MBA's haven given litigation a wide berth!

Anonymous said...

The suspension was as per the regulation cited in the press statement by NSE. Perhaps the CMA regulations should be revised to better cater for modern transactions of this calibre.

Anonymous said...

Sounds like an acquisition to me, take-over somewhat sounds forceful.. But anyway is the suspension of KK from trading a regulatory process? should market value the deal, through the increase of KK share prices or a decrease if the deal is not palatable? By suspending the share trading isn't CMA compromising on the efficiency of the market?

Anonymous said...

A bit vague on the facts but it's a basis to read

coldtusker said...

@Kauka: The judicial officers overseeing the Commercial Courts seem poorly versed in Economics, Finance, Business or Commerce!

@Anon 4:26:00
I am not familiar with the CMA Regs in this matter but a 4-year suspension for BOC & Carbacid seemed extreme. Surely, they should have amended their rules/regs since 2005 to better reflect the current situation?

Since 2005, Kenya has enacted a new constitution, gone through an election, etc!

@Anon 9:53:00
Semantics ;-) In the Cautionary Statement the term "Takeover" is used.

Anon 10:03:00
Not much is known. The key shareholders have not been 'officially' identified, the process of the Takeover remains vague, the timetable is not out either, etc.

On the other hand, the announcement was made in the evening of the 7th so less than 1 week has passed.

Anonymous said...

The approach being adopted by CMA and NSE will force minority shareholders into accepting the take-over offer, even if they believe that the value of the company's shares is higher than the price offered. If the offer is not accepted, minority shareholders should expect their shares to be frozen for an indefinite period!

Anonymous said...

I agree with anonymous above.

coldtusker, why would you want to sell this excellent company at 'only' a PE of 10? I would consider a price of 30 more 'fair'

coldtusker said...

Anon 1:24:00
There are certain rules that apply to Puma in regards to what it has to offer KK's minority s/holders. Should Puma delist KK, then the minority s/holders can stay as s/holders but the shares become illiquid.

I believe the CMA/NSE wants a minimum 20% float but Puma may not be bothered with asking for an exemption if it can get 80% of the shares. 63% have confirmed the sale thus leaving only 17% out there they need.

Anon 3:27:00
What a seller wants from a buyer is often a subject of market forces. Or not. Anyway, yes, the sellers would prefer 30/- vs 24/- but it has to make financial sense for Puma to pay 20% more than my (generous) estimate. My estimate is:
-> 90% above the last traded price
-> Higher than the NAV/share as I estimated it
-> 10x PER based on today's 'depressed' NSE
-> Includes a win vs KPC for KES 6bn

Anonymous said...

Thanks CT for your post. I am a shareholder in KK. How can Segman & Co' tell us how much value Puma will bring into the deal yet in the same breathe, tell us that Puma will be looking to buy out minority shareholders. Then, we should all DEMAND a very good price - min' 25shs - to get out of this. I encourage all shareholders to write to kenkob@kenkob.co.ke. I did

coldtusker said...

Anon 1:47:00

Excellent idea about writing to the Company. Perhaps even the CMA justifying why 25 should be the minimum price.

I think Segman was referring to the point of view of the employees & management.

Anonymous said...

i agree with a price not less than KES 30 because the fundamentals of the company; dividend payment, undervalue, regional expansion etc, puma is getting a deal and at the same time disrupting my long term plans with the KK shares. They will have to convince me that anything less than 30 is too good to resist otherwise given an option i would prefer not to sale. Too bad the buyout is mandatory.

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